Maharashtra, credit rating agencies at loggerheads

Girish Kuber, TNNSep 25, 2004, 08.12AM IST

MUMBAI: Maharashtra, one of India's richest and most industrialised states, has lately had a troubled relationship with the credit rating agencies. And if political parties actually implement all the populist measures they have promised it will only get worse.

If their public pronouncements are anything to go by, all political parties are equally oblivious to Maharashtra's rapidly descending rating, which indicates the weakening financial position of the state government.

The last nail in Maharashtra's empty coffer was driven in by the credit rating agency, CARE. In the first week of September, CARE downgraded bonds issued by the debt-ridden government's equally bankrupt entities to speculative grade.

The agency revised its rating from CARE BBB (SO) to CARE BB (SO). As the rating revision is a fall out of the deterioration of state finances, it amounts to a downgrade of the state government itself.

"Maharashtra government's fiscal position had displayed stress in recent years arising from a growing revenue deficit. This has led to the downgrade of the five state-owned corporations," CARE said while justifying its decision.

"The state's finances would further worsen if more guarantees or additional sops such as power subsidies are handed out"; the agency noted.

In August, another rating agency Fitch India had raised concerns about the state's depleting resources and widening deficit.

While rating bonds issued by some of the state-owned corporations, Fitch raised expressed concern about the aggregate debt level, which is budgeted to increase from 21% in 00-01 to 29% of SDP in '04-'05.

It also pointed out that the state has extended guarantees for the debt raised by various state-owned undertakings and co-operatives, which added up to 15% of SDP in '02-'03. "The Maharashtra government will have to embark on a fiscal consolidation process for controlling its debt levels" it said. The state government responded to these rating with a slew of populist measures, including free power for farmers and waiver of farm loans.

Last year, ICRA had lowered the state's rating. Another set of irrigation corporations, which include the Maharashtra Krishna Valley Development Corporation Limited , Konkan Irrigation Development Corporation, and Godavari Marathwada Irrigation Development Corporation, were affected by ICRA's decision.

Along with these irrigation corporations the ratings assigned to bond programs of Maharashtra Vikrikar Rokhe Pradhikaran Limited, Maharashtra Film Stage and Cultural Development Corporation, Maharashtra Jeevan Pradhikaran Limited, Maharashtra State Electricity Board and Maharashtra Water Conservation Corporation were also downgraded.

Another rating agency, Crisil, last year put the Maharashtra government in the default category. That had enormous impact as it reflected the state government's ability to meet its debt obligations. It also suggested that the bond programme of the state's corporations were non-investment grade.

Crisil's decision shocked the government. It evoked such rancour that the state finance minister Jayant Patil questioned the Crisil's judgement.

However, the sharp reaction resulted in no action and thus the state's continued its downward march.